Rate Watch #744 Embrace Inflation Now

Rate Watch #744 Embrace Inflation Now

October 15, 2010
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.000%	1.00	4.14%
	4.25%	0.00	4.21%
15 Year Fixed Conforming
	3.375%	1.00	3.64%
	3.75%	0.00	3.86%
High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county)
30 Yr Fixed Hi-Balance
	5.00%	0	5.07%
	4.75%	1.0	4.91%
15 Yr Fixed Hi-Balance	4.125%	0	4.27%
	3.75%	1	4.02%

* conforming loan limits for 2010 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now means "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county.) You can find the new High-Balance Conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by, but not limited to, the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining, and cash out (if refinancing).

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

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II) Fundamentals

Retail Sales (computed by the Census Bureau and adjusted for seasonal differences) for September were +0.6%. CPI was +0.0 core and +0.1 overall. Bernanke's statement of this morning indicates that nothing which the Fed has done has worked and that they will increase monetary base in the hope that this will get the economy going. The only sure effects will be inflation and dollar devaluation.

Initial Jobless Claims last week were 450,000, below consensus but above previous. The jobs market remains weak. Core PPI was +0.1%. Both inflation and deflation remain in check. (X-M) The trade Deficit was -$46.3 billion in September. Annualized, that (X-M) knocks about 3.8% off GDP.

The Consumer Metrics Daily Growth Index has been improving for the last week. (Look at the second graph on that page.) The index is still negative and near -6.0% but has been forming a bottom for about a month. The index is calling for another decrease in GDP, not as sharp as 2008 but this one will last much longer.

 

III) The Technicals

The daily is bearish. The weekly is bearish. The monthly is bullish.

For those who are not longtime readers, the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

The most important factor which will affect Treasury yields and mortgage rates is what the Fed is about to do. My opinions regarding this are below.

 

V) Embrace Inflation Now

Unless I am reading the wrong stuff it seems that there are lot of people, including the folks at the Federal Reserve, who believe that another really large increase in money supply is what is needed to get the economy going - especially since nothing else has worked. I need someone to explain to me why, when we have $1 trillion in excess banking reserves parked at the Fed, we need more money out there. This is the same Fed which just a few months ago was talking about how the economy was recovering and it was time to start the final act of its easy money policy by, presumably, decreasing money supply. A strange thing has happened in the last year plus. The Fed increased what is called Monetary Base (which includes excess bank reserves held by the Fed) but Money Supply as measured by M2 did not increase accordingly.

The fact is that consumers started slowing down discretionary spending this past January. With the stimulus having failed to increase consumer spending and there being no sign of fiscal restraint, the Fed is in a lousy spot.

So now the thinking is, I guess, that $1 trillion of excess reserves just is not enough and we need to be concerned about deflation. Bernanke must wake up at nights thinking about Japan which has had an economy mired for 20 years.

What may really be happening is a new policy with the slogan "Embrace Inflation Now." (For those of you too young to get that, check out "Whip Inflation Now") The eventual result may well be that we have the price of everything except housing increasing and the traditional relationships between income and housing expense are restored. Last year the government borrowed money to support tax credits to keep housing prices higher than they would be if we allowed market forces to set values. Since housing is the collateral for mortgage debt that may have seemed desirable as a modus of keeping banks viable.

The Fed may be thinking that merely whipping up concern about inflation will get people spending and provide a pop to GDP. It is hard to see how this would work at present. Are people going to buy houses when they are already overpriced and there is lack of job security? We already did a "Cash for Clunkers." Milk and bread may cost more 5 years from now but have a short shelf life.

The mistake with last year's health care bill was that it failed to address the high cost of health care. The government also did everything possible to keep home prices high. The rising costs of housing and health care have reduced discretionary spending. The consumer may not be able to take advantage of increased monetary base.

This past February Bernanke said that the "We're not going to monetize the debt"... stressing that Congress needs to start making plans to bring down the deficit to avoid such a dangerous dilemma for the Fed. Congress ignored Bernanke and now the Fed must deal with the problem.

If there is no choice but to monetize debt then the results will be: 1) inflation such as we have not recently seen 2) a devalued dollar 3) much higher mortgage rates. In a few years, the politicians who created the fiscal mess through decades of irresponsibility will be able to blame this on the Fed's increasing money supply.

I suppose that the Fed could theoretically increase the monetary base and somehow hope that those dollars remain parked at the Fed as excess reserves but that hardly stimulates the economy. If those dollars are going to stimulate economic growth it is hard to see how this can happen with contained inflation. The Fed may well have to give up its goal of inflation below 2% and settle for controlling it below 6%. The fact that the Fed announced no dollar goals for increase in Monetary Base may indicate that they will keep increasing it until it has the desired effect.

This is gonna be ugly. The era of contained inflation and low interest rates is about to become a thing of the past.

 

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Comments

[John Rowe]

Dick, I would be interested to read your take on the mess in the foreclosure document chain. I have heard that title companys will stop issuing policies on properties that are involved. What are you seeing in your business?

[Joe]

Get your money out of the banks, get your rabbit ears back, and load up on weapons. They can close your bank account with a switch, turn off your TV with digital, and everything else.

[Dick Lepre]

John, The foreclosure notarization issue is, in my view, overstated. The issue, essentially, is that people are notarizing something saying that they have read a big pile of paper when in fact they have simply been told that the beneficiary has not received payments and that per the note foreclosure can be instututed. Yes people are notarizing something which is inaccurate which is that THEY read this stuff. Do people in Congress read laws they vote on? Do borrowers read every page they sign? Does anyone read the 14 page document you are sent when yout smart phone software is updated? Banks instituting foreclosure will indemnify title companies against any losses so that buyers will be able to get title insurance.

[Dick Lepre]

WSJ has a good article on the foreclosure ducumentation issue:

http://online.wsj.com/article/SB10001424052748704049904575554372238256744.html?mod=WSJ_hpp_LEFTTopStories